Mountain Homes is considering an expansion costing $5.7 million that will increase net income by $452,000. The company currently has 2.3 million shares outstanding and no debt. The stock sells for $38 per share and the book value per share is $27. The current net income is $1.02 million. Assume the firm issues new equity to fund this expansion while maintaining a constant price-earnings ratio. What will be the EPS after the new equity issue?

Question

Quizplus · Accepted Answer

EPS = (Net income / Number of shares outstanding)New net income = $1.02 million + $452,000 = $1.472 millionNew number of shares outstanding = 2.3 million + (New equity / $38)To maintain a constant price-earnings ratio, the new price per share must be:$38 = (New net income / New number of shares outstanding)Solving for the new number of shares outstanding:New number of shares outstanding = $1.472 million / $38 = 3.87 millionTherefore, the EPS after the new equity issue will be:EPS = $1.472 million / 3.87 million = $0.60

Mountain Homes Is Considering an Expansion Costing $5